Four out of 10 limited partners (LPs) reported net annual returns of more than 16% across the lifetime of their private equity portfolios, a percentage close to record levels according to Coller Capital's Global Private Equity Barometer, a biannual investor survey released on Wednesday (June 8).
The survey received responses from 110 investors in private market funds comprising a representative sample of the global LP population worldwide between the middle of February and the end of March based on 2021’s valuations.
“The number of investors who reported net annual returns of over 16% across their private equity portfolios has only been higher once, in 2007, in the run-up to the Global Financial Crisis,” Chi Zhang, principal at Coller Capital told AsianInvestor.
“However, recent volatility in markets could see these figures change in the coming years,” she said.
Looking at historical data, Zhang stressed that private equity returns tend to have a smoother and lagging pattern than the volatility displayed in public equity.
“For example, after the record high reporting of 45% LPs with net annual returns of over 16% in 2007, the figure only dropped to 37% in 2009 post the GFC, and further dropped to 18% in 2011.”
APAC INVESTMENTS GENERATE GOOD RETURNS
Over 70% of LPs, which included pension funds and endowments, reported that their private equity assets have outperformed their public equity portfolios since the GFC.
LPs are also increasingly generating good returns from their Asia Pacific (Apac) investments, according to the survey. More than 50% of LPs have made more than 16% net from their Apac venture investments, while nearly 40% of LPs have achieved more than 16% net from buyout investments in the region.
“These are the highest numbers of LPs reporting net annual returns since the inception of their portfolios for Asia-Pacific buyouts and venture than we have seen in many years,” said Zhang.
“In fact, 2022 has more than doubled on the figure reported five years ago for venture.”
The number of LPs that said they would hit their target private equity returns, if their funds delivered only a medium performance for their funds cohort in their respective vintage years was also much higher in Asia-Pacific, than in North America and Europe, according to the survey.
“This shows the confidence that Apac investors have in their private equity investments,” she said. “It is also in the context where the Apac public equity index has underperformed against the global market over the past few years.”
ESG DRIVES VALUE IN ASIA
Most private equity investors in all regions of the world believe that environmental, social and governance (ESG) investing creates value both through proactive change to portfolio companies and through the exclusion of high-risk investments and business practices.
“More investors in Asia Pacific (70%) and Europe (70%) believe that ESG adds value by excluding high-risk investments and business practices and by making proactive, positive changes to portfolio companies than those in North America (59%),” said Zhang.
Asia Pacific being on par with Europe in deriving ESG value is not an unusual finding, according to Zhang.
“Past Barometers have reported similar regional trends regarding ESG. European LPs and GPs have led the way for many years on ESG and those in Asia-Pacific have adopted their operating models, leapfrogging the LPs in North America,” she said.
Two-thirds of European LPs have increased the number of sectors their organisations exclude from investment consideration for ESG reasons in the last five years.
Unsurprisingly, the survey found that climate change is by far the most important environmental focus of investors’ ESG programmes – with 93% of LPs reporting that they focus strongly on this risk.
European investors are more focused on most individual ESG risks than their peers in North America and the Apac region – with biodiversity and deforestation being a particular concern for them. Meanwhile, the survey found that Apac investors were more focused on air quality than their counterparts in other regions.